As an investor, it’s important to understand how a company’s authorized share capital affects you. This article will explain authorized share capital, provide real-world examples, and explain what it means for you as a shareholder.
Definition and Example of Authorized Share Capital
Authorized share capital is the amount of stock, both common and preferred, that a company is allowed to issue. A company’s authorized share capital is established in its articles of incorporation (also known as its corporate charter). The only way for a company to issue more shares than are currently authorized is to take the matter to a shareholder vote and amend the corporate charter.
Alternate name: Authorized shares, authorized stock, authorized capital stock
You can find any public company’s authorized share capital in its articles of incorporation. For example, if you looked at Microsoft’s amended corporate charter, you’d find near the very top that the company has the authority to issue up to 24.1 billion shares of common stock and 100 million shares of preferred stock.
How Authorized Share Capital Works
One of the most important steps a company takes when it incorporates is to file its articles of incorporation with the state where it’s operating. This corporate charter includes critical information about the company, including its name, purpose, how it will choose its board of directors, and more. Also included in the articles of incorporation are the number of shares a company is authorized to issue. As we saw in our Microsoft example, the number of authorized shares isn’t always the number of shares the company actually issues. In fact, companies often set their authorized share capital so high they’ll never reach it. Leaving room between the number of shares authorized and the number of shares outstanding gives companies increased flexibility. If they need additional capital for the business at some point, they have the freedom to issue more shares, as long as they don’t exceed the authorized share capital. If a company wants to increase its authorized share capital, it has to amend its corporate charter, which usually requires a vote from its shareholders. This shareholder approval is important because a company issuing more shares will ultimately dilute the ownership of its current investors. As an illustration, suppose a company’s articles of incorporation authorized 100 shares of common stock. Eventually, the company has issued all 100 shares, which are equally divided among 10 different shareholders, each of whom owns 10% of the company. The company decides it wants to raise additional capital by issuing an additional 50 shares of stock. If those 50 shares are sold to investors other than the existing shareholders, then each of the current shareholders would see their stake in the firm diluted. Instead of each owning 10% of the company, they would each own just 6.67% of the company.
Other Types of Share Capital
Authorized share capital refers to the number of shares a company can issue, but you also may hear about other types of capital. In this section, we’ll discuss these different types to help you understand how they differ.
Issued Capital
Issued capital refers to the number of a company’s shares that have been sold or distributed. As mentioned, the number of shares a company issues is generally far less than its authorized share capital.
Outstanding Shares
A company’s outstanding shares refers to the number of shares that are currently owned. A company’s outstanding shares and issued shares aren’t always the same, because a company can buy back its stock from shareholders. If that happens, the shares are recorded as treasury stock and are no longer considered to be outstanding.
Subscribed Capital
Subscribed capital refers to the number of a company’s shares that the public has agreed to purchase. When all of a company’s issued shares have been subscribed for, then its subscribed capital would equal its issued capital. However, if not all a company’s issued shares are subscribed for, then those remaining shares would be designated as unsubscribed capital.
What It Means for Individual Investors
As an individual investor, a company’s authorized share capital may not have much relevance to you. The number of authorized shares is rarely the same as shares outstanding. The value of a company’s outstanding shares is what’s used to calculate its market capitalization. It’s also what determines just how much ownership each share offers. A company’s authorized share capital may become more relevant if the board of directors wants to amend the articles of incorporation to increase it. In that case, you, as a shareholder, may have the right to vote on the change. And if you’re ever curious about whether a company you’re invested in might choose to increase its authorized shares, consult its articles of incorporation and latest quarterly report to find the difference between its authorized shares and shares outstanding. You might find that, as with the case of Microsoft, the company’s outstanding shares represent only a small portion of its authorized shares. In that case, it’s unlikely they’ll be holding a shareholder vote anytime soon to amend the number of authorized shares. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
